Business is Personal (Finance)

401K Fund Selection

2008-03-29T15:07:00Z

One of the challenges of putting a successful 401K plan together is fund selection. Obviously, picking funds with low expenses should be a priority. But then the question is what asset classes do you choose. Do you have the options available for the sophisticated investor? Do you you keep things simple and use mostly target retirement funds? Or offer both and the run the risk of too many funds confusing participants?

Lessons from previous 401k plan

In our previous 401k plan, we could pick 12 out of 40 preselected funds. 3 Vanguard funds were available but the rest were all actively-managed funds with expense ratios ranging from 0.50% to 1.75%. (And of course, there was the extra 0.50% asset charge to employees and another 0.50% to the employer.) We picked the best option from each category -- how successful was the lineup? Here is how plan assets were directed:

Money Market                     32% (cash)
Dodge & Cox Stock                16% (large value)
Vanguard Morgan Growth           15% (large growth)
American Funds Capital World G&I  7% (europe/japan value)
AIM Real Estate                   7% (reit)
Vanguard Total Bond               6% (intermediate bonds)
T.Rowe Price Mid Value            5% (mid value)
Bridgeway Aggressive Growth       5% (small growth)
Vanguard Index 500                3% (large blend)
California S&P Small Cap Index    2% (small blend)
John Hancock Lifestyle Growth     1% (moderate growth)

Looking at where the money went, the lineup is disappointing. Obviously, people were confused by the choices leading a whopping 32% in money market. Then there was a solid number of people picking Dodge & Cox and Morgan Growth since those two had decent track records and relatively low expense ratios (0.52% DODGX, 0.39% VMGRX). The rest of the selections ended up being random noise. One participant would choose random ABC fund at 1%+ ER, another would choose XYZ at 1%+ ER.

Of particular interest is how far down Vanguard Index 500 is on the list. We had access to Signal shares at 0.07% ER in this plan which meant people were more attracted to exciting fund names. Growth, aggressive growth, growth+income? Gotta be better than a regular index cuz they grow fast! (Yeah, I'm sure they read through the prospectuses and decide those funds fit their investment strategies better.)

Employee Fiduciary fund lineup

With this past experience in mind, I fleshed out the following criteria:

Choose index funds not only with low expense rates but with bland names. If you don't have a "ABC Enhanced Credit/Leveraged Aggressive Growth" fund staring in your face, you won't have people mesmerized by the name thinking choosing that fund would let them get away with saving less.
Offer a menu where picking all funds in equal percentages is a viable plan. (Thanks to The Finance Buff for posting this advice at Boggleheads.)
A final consideration was to be mindful of what happened in the 70's. The 70's was a terrible era where both stocks and bonds returned -3% real return annually due to high inflation. If you were retired and drawing down your portfolio, some gold and commodities might have kept you off Alpo.

The question still left on the table: use a few broad index funds or many market subset indexes. Part of me wanted to go with just a few funds to reduce performance chasing behavior (although the existence of TSP market timing newsletters say you can never eliminate the possibility). On the other hand, a high percentage of plan dollars belonged to a small number of sophisticated investors -- should I limit their choices in order to force participants to choose specific investment strategies? In the end, I decided on the many fund option with the hope of education working on a small number of employees. The funds I chose were:

Bonds/Fixed Income

Vanguard Prime Money Market
Vanguard Intermediate Bonds
Vanguard Inflation Protected Securities

Domestic Stock

Vanguard Value
Vanguard Growth
Vanguard Small Value
Vanguard Small Growth

International Stock

Vanguard European Stock
Vanguard Pacific Stock
Vanguard Emerging Markets

Other

Vanguard REIT
PIMCO Commodity Real Return D*
American Century Global Gold

Target funds

All Vanguard target funds available on demand

*PIMCO Commodity Real Return D ordinarily costs 1.24% per year. However, 0.25% of this amount is a 12b-1 fee which Employee Fiduciary rebates to us dropping our effective cost to 0.99%. Over time, we will accumulate enough assets to get into Institutional class decreasing costs to 0.74%.

Model Portfolios

Core in the education campaign was the development of model portfolios for employees to choose. I knew as much as I could try to teach people about investment strategies, people would forget everything 2 days later and ask "what funds should I pick?" (And as the plan trustee, I can't answer that question.) So I picked portfolio strategies advocated by various investment/finance authors and fitted them to our fund menu. The portfolios I presented were:

Harry Browne's Permanent Portfolio
Larry Swedroe's Concentrated Risk Strategy
Scott Burn's Couch Potato
Scott Burn's Margaritaville
Bill Schultheis' Coffehouse
David Swenson's Yale U Index
Equal percentage of all funds
Equal percentage of all stock and commodity funds

Employee selections

After all the write-ups and presentations, now it came time to see whether my groundwork would be effective in (1) getting employees to participate and (2) avoiding major investment mistakes. Here are the results after a few months of contributions:

Participation

100%

Percentage of Salary Contributions

8%

Model Portfolios Chosen

Coffeehouse   35%
Swenson       20%
Equal         20%
Swedroe       10%
Couch Potato  10%
Custom         5%

Overall asset percentages

Stock         69%
Bonds         22%
Commodities    9%

Fund percentages

Vanguard Small Value              13% (small value)
Vanguard Value                    13% (large value)
Vanguard Inflation Protected Sec  12% (intermediate tips)
Vanguard Intermediate Treasury    10% (intermediate bonds)
Vanguard REIT                      9% (reit)
Vanguard Emerging Markets          9% (emerging)
Vanguard European Stock            7% (european)
Vanguard Pacific Stock             7% (pacific)
Vanguard Growth                    6% (large growth)
Vanguard Small Growth              5% (small growth)
PIMCO Commodity Real Return D      5% (commodities)
American Century Global Gold       4% (gold)
Vanguard Prime Money Market        1% (cash)

35% of participants picked the Coffeehouse Portfolio so there is some overweighting to Large Value and Small Value. Otherwise, the fund picks look far more balanced than with the previous plan.

Employee Fiduciary 401K

2008-03-22T09:44:00Z

While doing background research for this article, I came across Los Angeles Times' Retirement at Risk series. Part 3 of the series on teachers is especially sickening. (Quick summary: teacher unions endorse ripoff annuity pushers in return for cash.) Moral of the story -- picking the right vendor can make a huge difference in the performance of a retirement plan. Of even bigger consequence for employers are the recent lawsuits over 401k expenses. Leaving open the possibility of a lawsuit 20 years in the future claiming unnecessary fees has penalized employees millions is a bad business decision -- never mind the hit owners & management would take as 401K participants.

With costs and fund choices forefront in the equation, my company chose Employee Fiduciary to administer our Safe Harbor 401K.

Costs

As of this post, Employee Fiduciary's cost schedule is:

Type                 Amount             Period    Paid By
-------------------  -----------------  --------  --------
New Plan Setup       $500               One Time  Employer
Existing Plan Setup  $1000              One Time  Employer
Administration Cost  $25/employee       Annual    Employer
                     $1500 minimum
Asset Charge         0% assets < 1M     Annual    Employee
                     0.06% assets > 1M

The 0.06% asset charge is a passthrough fee from MG Trust which is the entity that actually holds plan money. Since, Employee Fiduciary is not in control of this fee, there is risk MG Trust may increase it in the future.

Under our previous 401K plan, the per employee administrative fee was less at $1250/year. However, the employer paid an additional asset fee starting at 0.50% and gradually decreaseing to 0.10% at the 5M total assets. Crunching the simple math, eliminating the employer asset charges pays for the $1000 conversion fee and $750 termination fee in less than a year.

The average fund expense ratio from our previous plan was 0.74%. An additional non-decreasing 0.50% asset charge against employees was added on top. Added together, 1.24% is par for the course when compared to the average 401K plan. However, I'm used to investing directly at Vanguard for 0.25% so that was sore spot with me. Given our current contribution amounts, a 1% reduction in fees could be another million dollars for plan participants after 20 years.

Fund Choices

Employee Fiduciary uses an open architecture for investment choices. This means you can choose almost any mutual fund as long as you meet the fund requirements. From what I can tell, most investor-class fund shares have no minimums for group retirement plans. For example, Vanguard's minimums are usually $3000 for individual investors -- however, I was able to add Vanguard funds to our lineup even though I did not yet have the target dollar amounts for each participant. (I ran into the "almost" with Northern Global Real Estate -- no idea why this plan was not available to us.)

ETFs are also available under Employee Fiduciary's architecture. However, the cost is an annual $500 per ETF offered to manage discrete share issues. Because it is a fixed cost, high plan assets are needed before ETFs become the better choice. Let's use a simple example with Vanguard Large Cap Index:

0.07% Vanguard Large Cap ETF
0.12% Vanguard Large Cap Admiral
0.20% Vanguard Large Cap Investor
Investor class to ETF: 500 / (0.20% - 0.07%) = 384K
Admiral class to ETF:  500 / (0.12% - 0.07%) = 1M

For more exotic asset classes not offered at Vanguard, the spread may be much less. Let's look at International Real Estate for example:

0.48% iShares S&P World ex-US Property Index
1.07% Fidelity International Real Estate
FIREX to WPS: 500 / (1.07% - 0.48%) = 85K

Come by next time to read about choosing a fund lineup.

Posting delays (maybe)

2008-03-18T05:37:57Z

My wife just gave birth to a baby girl over the weekend so my routine will be in chaos for the coming future. I have a few articles already written and scheduled for release -- whether I can sneak in brief moments to write more in between feedings and diaper changes, I don't know yet.

Company-Sponsored Retirement Plans

2008-03-14T16:56:00Z

If you are running a company, sooner or later you will need a retirement plan in order to compete for workers. For a small company, the top three options to look at are: SEP-IRAs, SIMPLE-IRAs and 401Ks. Each has their own unique sets of rules and may be the right choice for you.

SEP-IRA

Typically, SEP-IRAs are recommended for self-employed situations. It is an easy plan to implement with high contribution limits and little administration overhead. If your business is incorporated, you can contribute 25% of wages to a retirement plan. If not incorporated, you can contribute 20% of net profit. In addition, you can sign your company up directly with Vanguard at no additional costs over an individual IRA account. Sounds good, right? There is one slight complication -- the contributions are made in addition to salary by the employer only and must be applied at the same rate to all employees. This makes individual choice very limiting for both company owners and employees. Owners typically will want to shelter as much income as possible but if they put the maximum 25% of their salary away into tax-deferred space, every employee would receive a similar contribution. Likewise, any employee wanting to accelerate their retirement savings would not have the option to do so.

(A Keogh plan looks very similar to a SEP-IRA except for pre-declared contribution percentages and more paperwork since it is a pension plan. With the advent of the SEP-IRA, there should be no reason for a small company to choose a Keogh.)

SIMPLE-IRA

SIMPLE-IRAs are available for companies with 100 employees or less and operate like 401Ks. Employees decide how much of their salary they want to defer and the employer makes matching contributions. Employees must make either 2% matching to all employees whether they participate or not -- or up to 3% elective 3 out of 5 years. Both matching schedules require immediate vesting.

Reasons for choosing this plan -- one page annual filing, low cost of administration. Like with a SEP-IRA, you can open up an account directly with Vanguard at the cost of an annual $25 per fund used per employee. (The fee is paid by the employee until they accumulate $100K in total assets at Vanguard.) As the I in IRA stands for individual, employees have the right to withdraw or rollover any contributions after a 2 year waiting period.

Now for the bad:

Lower contribution limits compared to SEP-IRAs and 401Ks. For 2007, employee contributions are limited to 10.5K versus a 401K's 15.5K. Catchup contributions for employees over 50 are 2.5K versus a 401K's 5K.
An employer may not match more than 3%. My guess this is to avoid self-employed from contributing 10.5K + 328% matching to reach the 45K maximum qualified plan limit on ~50K of income.
$25 per fund charge at Vanguard means employees must pick a single target retirement fund to avoid extra fees until they build up a significant amount of money.

(There is also a similar plan called the SIMPLE 401K where the only difference seems to be the ability for employees to take loans out against their assets. However, I don't know of any fund company offering this option.)

401K

If you are a hermit who just left your cave, read up about 401K plans at Investopedia. Otherwise, there's no point in going over basics you should know already or can read about on anywhere else. Instead, I'll jump right to employer issues.

Cost -- You will not be able to setup and make the annual ERISA filings yourself. You will have to hire a third party administrator to manage the plan for you. The big boys (Vanguard, Fidelity, T.Rowe Price, etc.) only will deal with you directly if you have enough plan assets or are willing to pay a nice annual fee. This means you must be diligent investigating the fee schedules. Here is a Boggleheads post I wrote a few months back listing about a dozen low-cost 401k options.

Plan Testing -- The IRS frowns on deferring too money for owners and highly paid employees (97K+ for 2007, 102K+ for 2008). Hence, annual contributions must be tested against formulas. If a plan is deemed top heavy, contributions must either be returned (don't file those individual tax returns early) or additional matching must be made on behalf of non-highly paid employees. In a small company where a large percentage of employees could be highly paid, this ends up being a crippling limitation. Luckily, there is a solution called the Safe Harbor 401k. It simply is a regular 401k except with mandatory 100% matching up to the first 3% of salary and another 50% for the next 2% with immediate vesting. Additional matching is possible but where discretionary (ie, depends on profits), it is capped to 4% total on 6% of salary.

The plan my company switched to was a Safe Harbor 401k administered by Employee Fiduciary. My next posts will talk about the plan EF offers and the funds we picked.

Carnival of Personal Finance #143

2008-03-10T07:35:09Z

Part 1 of my investment spreadsheet articles was included in the latest Carnival of Personal Finance over at Quest for Four Pillars. I'm way down on the list but better to be near the end than in the middle. Amongst the other articles at this carnival, there are a few that relate to topics I've written about or will write about.

Amateur Asset Allocator wrote about variable annuities and gave all the detailed reasons of why you would not want to use them. If you want to see the mathematics behind how bad it can be, check out Investment Spreadsheet Part 3.

Funny About Money talked about libel and slander insurance for bloggers. I have a future topic planned about various insurance policies business owners must consider because you won't be able to just get away with the standard health, auto and homeowner categories.

Investment Spreadsheet - Part 3

2008-03-07T04:42:00Z

Spreadsheet Goodness

This is part 3 of a 3-part series.

Part 1
Part 2
Part 3

Download the spreadsheet as:

OpenDocument: InvestmentTaxSummary.ods
Excel: InvestmentTaxSummary.xls

In parts 1 and 2, we looked at retirement and taxable accounts. Now let's really dig deep into the rabbit hole.

Non-deductible IRAs

Say you have the option to put money in a non-deductible IRA? Is that the better option than putting it in a taxable account? Non-deductible IRAs defer taxes on growth until withdrawal with qualified capital gains/dividends converted to regular income.

The ending $29K number is less than holding taxable index funds. The only case this would make sense is for REITs, Bonds or high-turnover stock picking.

Variable Annuities

Variable annuities act just like non-deductible IRAs. You can treat the two the same except for two differences. (1) No limits on contributions. (2) It uses a nominal insurance contract to provide tax deferred growth which requires extra expenses (mortality risk expense) to pay for the insurance. Now if you called up Vanguard directly to open a VA, they would charge you a 0.30% M/E in addition to their standard fund expenses. (Other companies offering low-cost VAs include Fidelity at 0.25% and Jefferson Mutual at a fixed $240/year.) In this case, we modify the return from 10% to 9.70%.

The ending number is just a tad below a taxable account holding a diversified index portfolio so I would not use a VA to hold any investment that has a significant amount of qualified gains. On the other hand, if you have used up all money in your 401K/IRA/Roth IRA/HSA, using a VA to hold Bonds and REITs may produce better results than forcing other high yields into taxable. From these numbers, it does not "seem" like the complete ripoff people constantly say VAs are.

Variable Annuities Part 2

Unfortunately, low-cost VAs are not the norm in the industry. The typical insurance company will charge M/E of 0.75% to 2%. Let's use 1.25% as the average and see what happens.

This number is just slightly higher than the 100% income rate taxable option. Great, you saved on taxes -- too bad all the tax savings went to the insurance company. (Politically/economically, would it be better for an insurance company to earn profits versus the government collecting taxes? Well that's a totally different discussion.)

There are specific instances where a high-cost VA can provide some interesting benefits. For example, if you can't get life insurance due to health problems, some companies offer a death benefit rider to their VAs which may give you enough coverage for funeral expenses and a bit of inheritance tax.

Permanent Insurance: Whole Life, Universal Life, Variable Universal Life

Now let's kick this spreadsheet into high gear. Suppose you have an agent hot on your heels to sell you some type of permanent life insurance policy. First, if you don't max out your 401K/IRA/Roth IRA/HSA, there's no need to consider -- get term life and invest the difference. But say you do that already, you meet your desired allocation target in low tax-drag taxable accounts and you still have plenty of money to invest. Before we start popping numbers into our spreadsheet, we must look through a prospectus with a fine-toothed comb. From reading through a Western Reserve Variable Universal Life (VUL) prospective, I extracted out the following costs:

Sales Load
- 6% for policies $0-$250K, years 1-10
- 2.5% for policies $0-$250K, years 11+
- 3% for policies $250K-$500K, years 1-10
- 2.5% for policies $250-$500K, years 11+
- 0% for policies $500K+
Standard Unit Charge
- 0.096% of policy face value, years 1-10
- 0%, years 11+
M/E
- 0.75% years 1-10
- 0.60% years 11-15
- 0.30% years 16-20
- 0% years 21+
Average fund expense ratio: 0.75% (+0.50% higher than Vanguard funds)
Cost of insurance: we will ignore this component for simplicity purposes -- the assumption here is you would pay this cost through term coverage also

With this in place, we begin with target premium numbers. Target premium is the amount the insurance company believes to be adequate to fund the policy. For a mid-30's non-smoker, the target premium looks to be about 0.70% of the policy face value. We will add the Sales Load and Standard Unit Charge to the W/D (withdrawal) column to simulate the charges.

100K VUL -- Target Premium

If tax rates stay the same, the 100K VUL will never catch up to the taxable portfolio. Now we are in historically low tax rates -- especially for long term capital gains and qualified dividends. In what kind of tax environment would this policy catch up after 30 years? So we go over to the Taxable Tax Rate cell and slowly increase the number. Right about 30% is when the two 30 year numbers match ...

... With major caveat. The "tax free" benefit of permanent insurance comes in the form of loans against the policy. At the time of passing, the death benefit payout pays off the loan leaving the remainder for your heirs. This means if you "borrow" money from your policy, it must remain in force or otherwise a total disaster occurs -- all money borrowed immediately gets converted to taxable income! So in effect, you can only tap some percentage of your policy for your own use with. In this case, I've randomly guessed 80% as the number.

250K VUL -- Target Premium

With lower sales load starting at the 250K threshold, this improves the VUL performance by ~3% over the full sales load but still not a very enticing option.

500K VUL -- Target Premium

With no sales load, this policy's total cash value almost matches the taxable portfolio after 30 years.

100K VUL -- 7-pay

For almost everybody, insurance is an absolutely horrible investment vehicle. However, there is a small subset that might be able to benefit from it. The Standard Unit Charge appears to be a fixed amount per year. To make it a smaller percentage, put more money in. For a mid-30's non-smoker, the quote I received says the IRS will allow annual contributions up to about 3.5% of policy face for 7 years. (This is called 7-pay because you fully fund your policy in 7 years.)

In this calculation, we bumped up the Max Borrow amount to 90% due to the larger CashValue:PolicyFace ratio.We see the 100K VUL funded at 7-pay limits catches up to a taxable portfolio after 30 years versus never at the target premiums.

250K VUL -- 7-pay

Break even at 17 years.

500K VUL -- 7-pay

Getting rid of the sales load has brought break even point to about 6.5 years. Sounds like a viable option -- assuming:

you max out all traditional retirement vehicles 401Ks, IRAs, HSAs, etc.
you have a portfolio of tax-efficient investments in taxable
you have a big emergency fund to avoid tapping into the policy early (surrender charges + losing the tax benefits)
you will have plenty of money in retirement so you can keep the policy in force
you don't need to tap all the money and will leave ~20% of the policy's cash value as death benefit for your heirs

This is the type of investment you might carefully consider if you are investing at 40K-50K annually (90K-100K for a couple), can guarantee that investment stream for the next 7 years and can live with the limitations. Obviously, this is beyond the realm of most mortals as the median household income in this country is 50K. Who has that much money after taxes and expenses? This is the reason why VULs are commonly referred to as retirement plans for the rich.

Final Words

Remember all numbers and projections I showed here are mere samples. Don't come away from these articles with the idea that X is always better than Y. It will always be up to you to do due diligence on your own situation and options. Research, analysis and critical thinking -- use your brain and it will be your most important tool to evaluate investments. Download and have at it.

Investment Spreadsheet - Part 2

2008-03-04T15:20:00Z

Spreadsheet Goodness

This is part 2 of a 3-part series.

Part 1
Part 2
Part 3

Download the spreadsheet as:

OpenDocument: InvestmentTaxSummary.ods
Excel: InvestmentTaxSummary.xls

Previously, we looked at samples of the usual assortment of retirement accounts. The standard retirement options are actually the easiest model since the math behind the taxes is straightforward -- either apply taxes before, after or never. Now let's look at taxable investments.

401K versus Taxable Index funds

I have seen the question asked before -- my employer does not offer matching, should I instead put my money into taxable investments and pay 15% tax on gains? Well head over to the Taxable section and give it a test. Now we have another variable to look at. Yr Distrib is the portion of gains that are distributed every year as a taxable event. For example, if you own a diversified portfolio with an average 2% dividend yield and 0.5% turnover, that would be a 25% yearly distribution based on a 10% annual return (2.5 / 10 = .25). We then put tax as 15% long-term capital gains + dividends, 25% regular income, 5% state income for a total of 22.5% as the effective tax rate.

At $30.5K after taxes, it's quite a beat-down from 401Ks. For a taxable account to break even, income tax rates would have increase up to 44% ((54666-30581)/54666) after you stop contributing while LTCG/QDIV rates remained constant.

Taxable Accounts: Growth Index Funds

Let's say you put decided to put everything into just Growth Index funds where average yields+turnover is about 5%? Does that improve the situation?

About 4.7% better -- certainly some potential for splitting assets across low yield and high yield categories if you invest more than the 401K+Roth IRA annual limits.

Taxable Accounts: Systems Trading

What if you prefer system trading where you turnover your portfolio every year? (Examples: Magic Formula, Dogs of the Dow, etc.)

Looks to be a 11%+ drag compared to the growth index option, 7%+ compared to total stock indexes. Do systems trading under tax-advantaged accounts if possible.

Taxable Accounts: Income Tax Rate

What if we have taxable investments/strategies at regular income tax rates -- say bonds or day trading. (For this exercise to isolate the tax consequences, assume bonds return 10%.)

Ouch, quite a big tax hit. We just went from $38K for 401Ks/Roth IRAs to $32K for Growth Index Funds to $24K in this case. Absolutely the top priority for sheltering under some type of retirement account (or to avoid completely in the case of day trading).

Taxable Accounts: REITs

With REITs, the yearly dividend distributions are taxed at income rates. However, the capital gains are at qualified rates. To get a close projection, set the yearly distribution to 40% (4% yield / 10% total return = 40%) and the default tax rate to 30%. At year 20, set yearly distribution to 0% (assume you sell before the big end of year distributions) and then the tax rate to 20%.

At these tax rates, it's about par with systems trading tax drag. At higher tax rates, the impact will be higher.

Taxable Accounts: Different Tax Rates?

Something to keep in mind -- we have historically low LTCG/QDIV tax rates. LTCG rates used to be 28% and there was no concept of QDIVs. And from the rumblings, it's possible qualified gains might have to be bumped up to 20% or 25% as part of fixing the AMT package. We are also at historic low dividend yields -- before the 90s boom period, 4%-4.5% was the average yield. Let's see what happens when we change these parameters.

So investments in an 80's like environment incur a 9% tax drag compared to the tax rates today.

Taxable Accounts: Cost Basis

One last variable to look at. Suppose you invested $5000 over the years and it has grown to $10,000 now. In addition, there has been about $1,000 in taxable distributions. So to account for only $4,000 of the starting balance being taxable, we would enter $6,000 in the Cost Basis field.

To be continued in part 3 (variable annuities, variable universal life) ...

Investment Spreadsheet - Part 1

2008-02-29T14:00:00Z

Spreadsheet Goodness

This is part 1 of a 3-part series.

Part 1
Part 2
Part 3

Download the spreadsheet as:

OpenDocument: InvestmentTaxSummary.ods
Excel: InvestmentTaxSummary.xls

Knowing how to evaluate investments across across tax structures is an important core skill to have. Perhaps you need to run projections whether you should even start a small business. Or maybe you need to decide what retirement plans you will make available to your employees. In the past, I usually created one-off spreadsheets to model specific situations. However, I've been working on a unified format that let's you model everything from 401Ks to variable annuities. I think I finally fixed the last bugs so I'm ready to release this spreadsheet to the public.

Projecting 401K Contributions

Let's start simple -- suppose you plan to contribute $100 a month to your 401K for the next 10 years and then contribute nothing for the next 10 after that. How much money will you have when you retire in 20 years assuming annualized return of 10%? So let's head over to the Tax-Deductible section and fill out the following numbers like so. We'll make the simple assumption your tax rate will be fixed at 25% federal and 5% state.

And we have the answer. About $54.5K before taxes are applied. If you took it out all at once fully taxed at a single marginal rate -- $38K.

Historical Returns

You might say 10% every year is not accurate. In fact, you think 1970 is coming back with a vengeance. So we edit the % column with the actual S&P500 numbers from 1970-1989.

The nominal returns end up being even better ($88K/$61.5K) because contributions during 1970-1979 bought a lot of shares at discounts before the 80's. (What the real returns were is a story for another topic.)

401K versus Roth IRA

As you know, Roth IRAs are fully tax free (for now). That sounds way better than a 401K or Traditional IRA right? Let's head over to the Tax-Free section and give it a try. Key point: the monthly contribution is not $100 but $100*(1-tax) because you must pay tax on it first -- hence we put $70 as the monthly contribution.

Amazing, the $38,196 number matches the 401K number perfectly. You did not think the IRS was actually going to give you more money right? This is why people say fund one or the other depending on what your current tax rate is and what you think your future one will be. Better yet, fund both if possible to diversify for taxes.

HSA

Do you qualify to fund a Health Savings Account? When used for qualified medical expenses, it's the only thing available where you do not pay tax on either contribution or withdrawal. So we enter the pre-tax amount of $100 in the Tax-Free section.

No surprise, 30% higher than both the 401K and Roth IRA number. If you have an HSA option, make it your number one priority. Since the IRS is matching your funds by your tax bracket, that may even beat a 401K with matching. (Do both though!) Some employers will even fund part/all of a HSA which would make it truly the best thing since sliced-bread. And as far the limited use, everybody encounters medical bills in life -- you will be able to take the money out tax-free sooner or later.

To be continued in part 2 (taxable accounts) and part 3 (variable annuities, variable universal life) ...

HSA plan followup

2008-02-25T11:00:00Z

For those of you coming into this topic cold, here's a good primer at The Penny Saved: Health Savings Account Vs Health Reimbursement Account Vs Flex Savings Account (and keeping my hair for cheaper)

I originally planned to write a followup on my previous HDP/HSA article after a few more months of medical bills. However, I just noticed an error in my spreadsheet so I've decided on an earlier update. The initial spreadsheet did not have a row for transaction costs -- this has been fixed now, download here: HSA_investment_options.ods, HSA_investment_options.xls

Spreadsheet Example: HSA Bank

Let's use HSA Bank as a quick example of how to use this spreadsheet. HSA Bank charges $2.25 per month if you have a bank balance of less than $3000. On the other hand, they pay a puny 2% interest compared to 5.12% at Patelco (minus $1/mo in fees). So we have 2 options:

Keep $3000 at HSA Bank earning 2% interest and pay no fees
Keep $0 at HSA Bank and pay $39 in fees

To run the numbers on this scenario, fill in the spreadsheet like so:

Although people don't like fees in general, sometimes it's better to pay them. In the above example, the 3.12% interest difference on $3000 is $93.60. Would you pay $39 in fees to get $93.60 back? I would.

New Investment Option: Bancorp HSA

While browsing Boggleheads, I ran across this message about Bancorp HSA using a Fidelity platform with mutual funds available for $4.95 per transaction. (The price is scheduled to increase to $5.95 as of March 14 -- see their fee schedule for more details.) Fees are waived if you have an automatic ACH deposit plan. Among the list of 1500 mutual funds available at $5.95 are Fidelity's Spartan Index funds. Assuming you meet the minimums for those funds (or the minimums are waived for HSA accounts), this seems to be the lowest cost investment option available. (The updated spreadsheet includes Bancorp HSA.)

Updated Summary

In the below table, Bancorp HSA uses Fidelity Spartan funds at above 10K balance. Below 10K, index funds from Dreyfus, Columbia, JPM Morgan, etc are available ranging from 0.15% to 0.60%.

	HSA Administrators	HSA Bank	HSA Resources	Saturna Capital	Select Account	Bancorp HSA
$1000	5.62%	5.54%	6.84%	2.55%	5.43%	2.05%
$2500	2.56%	2.30%	2.82%	1.83%	2.51%	0.97%
$5000	1.54%	1.22%	1.48%	1.59%	1.43%	0.61%
$7500	1.20%	0.86%	1.03%	1.51%	1.21%	0.49%
$10000	1.03%	0.68%	0.81%	1.47%	0.88%	0.25%
$15000	0.86%	0.50%	0.50%	1.43%	0.88%	0.25%
$20000	0.78%	0.41%	0.47%	1.41%	0.80%	0.22%
$35000	0.51%	0.29%	0.33%	1.38%	0.70%	0.18%
$50000	0.41%	0.25%	0.27%	1.37%	0.66%	0.17%

Tax Filings

Remember to file Form 8889 if during 2007:

You or your employer made contributions
You withdrew money for any reason (medical, non-qualified or rollover)

After looking through this form, it appears the cheapest and quickest way to transfer money across acounts is to write a check to yourself and deposit the money manually as the various HSA administrators all seem to charge fees for an outgoing rollover. If you do it by hand, fill in a simple offset on lines 14a, 14b, 14c during tax time and it's a done deal.

Paying Medical Expenses

No issues. The bills I get in the mail, I use online bill pay. When I go to the pharmacy or optometrist, I use the debit card. And for reimbursements, I write a check to myself. Pretty easy.

My balance has remained relatively constant even though there's a constant stream of bills for my wife's pregnancy. The bills seem spaced out just enough to be covered by the employer contributions. Of course, making an additional contribution last year has helped maintain a good buffer. At this point, we're about $1800 away from the annual deductible and $2500 away from the out of pocket maximum. Once those numbers are hit, I expect my account to start growing again.

You also have the option of never paying a single medical bill out of your HSA. Instead, let it grow tax free until you pass away. At that time, your estate will then submit all your saved medical receipts for reimbursement. The math works out in your favor -- assuming Congress doesn't close this loophole.

Store Startup Costs

2008-02-22T14:00:00Z

Introduction

I can't think of a hook for this post so let's just pretend you just read something enlightening and skip right to the meat of the article.

Scenario

Location: Chinatown, San Francisco
Business: Ladies' clothing
Size: 750 square feet
Traffic: Medium high
Demographics: Low-to-medium income

The Chinatown neighborhood is a high traffic area with a mix of tourists and everyday shoppers.

Costs

Given the above setup, here is our startup costs in order by amount:

$25,000		lease buyout from previous store owner
$8,500		security deposit and 1st month rent
$7,500		inventory
$1,000		remodeling supplies
$750		store fixtures
$250		various licenses

$43,000		total

Split between my wife and her business partner, initial investment was $21,500 per share.

Lease

The biggest cost was getting the store location. In an existing popular shopping district, the rules of the game are slightly different. There are no empty storefronts waiting for businesses to fill them. Instead, the only way to get in is to keep a lookout for the few shopkeepers moving on and outbid competitors to get the old lease transfered to you. In effect, the lease has a monetary value beyond what a business in it produces -- and the value may go up or down depending on economic cycles and inflation.

Remodeling

In the costs there is a line item for remodeling "supplies" but zilch for remodeling "labor". Remodeling is one of the few startup costs that can be negotiated away using design, lighting, paint and sweat. We had a handy crew of friends do all the work over a weekend -- total costs were: $100 for lunch, $500 for a celebratory dinner and a mental bill for future repayment of favors. Counting up the people plus the time spent, professional contractors would have been an extra $20,000 out of pocket. (A friend opened up a similar-sized store, paid $40,000 for their remodeling and the contractors took their sweet time in finishing the work.)

Here are our before and after photos:

Before

After

A dramatic transformation on just $1,750. A big eyesore in the before photos is the counter display -- looks more in place with the wood floors and yellow color scheme.

Conclusions

Blah, no conclusions either.

Jobs, hiring, networking

2008-02-15T14:00:00Z

Recession is in the air, people are tightening their belts and polishing their resumes and advice on networking is blooming. How do you network anyways? Let's see if Google can help us. I type into a search "networking + jobs" and one of the first results has the following passage:

"Wondering how to find your next job? Try networking -- the best way to find a job!"Wow, why didn't I think of that? Join up networking groups right now ... and meet up with thousands of other people looking for jobs. Hmmm ... there seems to be some missing steps in this strategy. Perhaps it might be enlightening to see a perspective from the hiring side. Here's a summary of how my company has found employees:

Former co-workers
Client contact
High school friend
Craigslist job postings
Online gaming
Customer of my wife's store

The first few sources should not be a surprise. People you worked with -- either as coworkers or as contacts or during school -- tend to be gravitate to the top of hiring lists because you know what they can do. The last items deserve more explanations. For now, I'll skip talking about Craigslist as I probaby will dedicate a full article to flesh out what resumes and applicants caught our eye.

Online Gaming

Before getting married, I was big into computer games. With the internet, gaming was even more addictive since you were now facing people as good or better than you. Beating a game was no longer the end of the story -- there was always the option to improve your skills and face somebody even better. So in my game of choice, I applied to join a gaming clan where we competitively faced other clans in formal leagues. To be honest, I was not that good but I had some extra factors in my resume -- plenty of computer hardware and several server-level internet connections courtesy of my company. (Being able to host servers where clans can meet and practice is big-time currency in the online gaming world.)

Most gaming clans use IRC as the default method of communication to coordinate practices and matches against other clans. It became natural routine to be connected to IRC all the time so while I was busy programming, I always had a small IRC window open at the bottom of my screen to monitor conversations. The nature of IRC is semi-anonymous since all we see are gaming nicknames; hence people tend to be truthful about what's going on in their lives. When they're working on a new project, IRC is the first place they'll talk about it. When they're sick of school or work, they'll talk about it on IRC. When they have plans for travel or relocation or change, IRC. When they have a computer issue or a solution to a computer issue, IRC. Throw in the random chit-chat life in general and you end up getting rather good feel for everybody's personalities and abilities.

When my company picked up more customers than I could handle, all I had to do was open a private message window to the member I wanted to recruit as I knew he had the programming skills and was in the right stage of life for a change. Over time, we ended up hiring 2 members from my gaming clan as full-time employees and 2 more for contract work. There's a few more members I'd have no qualms about hiring since I know their skills in detail from trading tricks & tips about computer hardware, server software and/or programming. (Whether I could have the work enticing enough to attract them is a different story.)

So kids (and adults who haven't cut the cord yet) -- the next time your parents nag you about computer gaming, say you are networking. I'd suggest picking games that require teamwork versus off-line or one-versus-one games. And don't play Worlds of Warcraft as MMORGs tend to be all-consuming -- anybody competitive you meet in that environment probably wears diapers to avoid bathroom breaks.

Store customer

My wife runs a boutique clothing store and her target customers are rather talkative. For them, shopping is more of a pastime so while they're browsing for clothes, they tend to gab away. The typical topics are work, school, family, housing which is probably not too far off from what everybody else talks about. One customer mentioned she worked a half block down the street as a cashier in a souvenir shop while studying accounting at the local community college. Before you jump to any conclusions -- no, I did not offer her a job just like that.

The story now takes meandering route before we return to the networking topic. I have a son that recently hit 2 years so he is quite the handful. After my work shift is over, I pick up my son and head out to my wife's store to hang out for a while. Being the typical rambunctious toddler, he often ransacks the store so I often take him for walks around the neighborhood to give my wife some sanity. On the days I pass by the aforementioned souvenir store, the cashier was always busy reading textbooks when no customers were shopping. (Although she would fly out to play with my son if she noticed us.)

One night, I dropped by the office and our CEO was there again working the midnight hours away. I point-blank ask him if we need to hire somebody to take some duties off his plate. He agreed yes and the first idea in my head was my wife's customer. Within days, we arranged an interview with her and the rest was history. Currently, she works for us a few days a week while continuing her college education. The managing staff uniformly are impressed with her tenacity and attention to detail -- we definitely would like her to become our full-time accountant after finishing up school with eventual growth into a controller role (and ultimately CFO) as the company grows also.

So when you're shopping (or doing anything else), it doesn't hurt to chit-chat a bit. While not every shopkeeper will have a spouse involved in running a separate company looking to hire, entrepreneurs tend to know other entrepreneurs so you never know.

What this all means

The big unknown in hiring is work ethic and ability to learn more skills. Perhaps large companies can get by with the square hole + square peg method just from sheer number of workers but small companies are always under the gun for resources and having flexible, ambitious workers is a must. Unfortunately, resumes and interviews don't provide the window into people to make this judgment. After all, applicants can practice their words and speeches into perfection so you can't discover the real person behind the polish with that brief interaction.

One bad employee could kill a small business which means networking is just as important for hiring as job seeking. And the best type of networking is natural social interaction. Look not for the person who's mingling at a trade show party handing out business cards and talking quick blurbs about themselves. Instead, keep mental tabs on everyday contact. The barista making your latte, the receptionist answering the phone at your doctor's office, the clerk ringing up your purchase -- in all likelihood, they want to move up in the world and are looking for that foot in the door. While you would not hire somebody on the spot after 6 seconds of conversation, perhaps you can give them more opportunities to reveal more about themselves when you periodically patronizing their workplaces. (It may not be polite to eavesdrop but it works.)

Job seekers -- you cannot tell from appearances who has contacts or influence to help your career. If nature's law held sway over this arena, business owners would have red plumes on their jackets, CEOs would wear yellow robes and hiring managers have green cuffs. (Although I do have a wag you would get better odds focusing on quiet people doing more listening than talking -- after all, it seems slightly boastful to talk about having decision making powers over others unless you're in a bar trying to pick up the opposite sex.) Since it's not that simple, networking needs to be a integral part of you instead of an active thought or process. When the time comes when you need to call in some chips, you definitely do not want the other person to be thinking "first call in 3 years and it's to ask about a job".

Watch out for scammers

2008-02-13T05:11:21Z

I have a dozen topics lined up to be published about once a week but I'll interrupt that schedule to post a public service announcement. While the emphasis is now on internet scams (Nigerian scam, etc), you still need to steer clear of off-line scams.

Just today, my mom got a call saying my car was towed. I needed $200 ASAP to get my car out of impound and someone would be by to get the cash for me. Of course, I didn't make the call because my cellphone was supposedly locked in the car. Now, this entire attempt in my mind was completely laughable. (1) I don't need $200 from my parents. (2) I certainly would be in no hurry where I'd send some random stranger to my mom's house. (3) I have no problems walking home or to my office in order to get access to a phone. However, the fact this scam attempt happened says some people do fall for it -- especially the elderly.

This is not the first time somebody has tried to scam my parents. A while back, she got a call saying my brother owed $10,000 but if she would give them her bank account info right then and there, they would cut the amount due to $4,000. My mom actually got her check book out before she asked a few more questions about this supposed past due. That was when the gig was up as the info they had was from multiple people. However ... if they had nailed that part right (which is not too hard considering how wide our personal data has dispersed), she might be out $4,000 as we speak.

So if you have parents and relatives getting older and hitting the age where their minds are slowing down, periodically reinforce that there are a lot of scammers out to get them. It's bad enough with the scammers that come at you legally (e.g. unethical mortgage/stock/insurance brokers) -- let's at least avoid outright fraud.

Health Savings Accounts (HSA)

2008-02-08T12:08:37Z

For my first "real" post, I have resurrected an article about health insurance I was working on late last year. It's been sitting on my hard drive for the past few months while I've pondered how to publish this.

Traditional health care expenses

I never thought much about health insurance as I had not seen a doctor since Bush Sr was in office. (I did visit a walk-in acute care center for a few drops of peroxide to clear out extreme wax buildup in my ear.) While I knew that it was important to be covered by insurance, I had no idea what kind of coverage I had or how much it cost. It was only after my wife's pregnancy (and son's birth) that all sorts of medical bills showed up at home. Every time I opened up a bill, I'd frown in puzzle -- doesn't insurance cover this and if not, what's insurance good for then?

Previously, I had talked in passing to our CEO about reviewing the benefits package (medical, 401K, etc) but neither of us had it as a priority on our to-do list. But after being harassed by this flock of medical bills, I took on the project as my personal hobby. Step 1: I looked through our current health insurance plan; my reaction after looking at the numbers: YIKES! For 90% coverage from Blue Shield, our company was paying $8K a month for 9 participants. (12 people total -- classified as "small group" so Blue Shield charges us an extra 10%.) To top it off, a 11% rate increase was scheduled. After payroll, this was definitely the biggest expense on the books. My specific premiums were $15,000 per year and I still had to cover $3500 in out of pocket expenses for the birth of my son -- this did not feel like a bargain.

The search for options...HSA?

Thus began my search for health insurance options. I had come across mentions of the HSA acronym in the past but my brain usually glossed over the descriptions thinking it was yet another variation on the use-it-or-lose-it FSA. Now that it was my job though, I finally read up about Health Savings Accounts and realized this is the best thing since sliced-bread! The quick low-down on HSAs:

Tax-free contributions -- can come from employee or employer
Annual contribution limit: $5650 for family, $2850 for individual -- individuals age 55+ can contribute another $700 per year
Tax-free withdrawals for qualified medical expenses at any time
After 65 1/2, withdrawals for non-medical purposes treated like a Traditional IRA
Withdrawal for non-medical before 65 1/2 subject to tax + 10% penalty
Money totally under employee control
Requires high-deductible medical plan

As far as I know, this is the only savings/investment vehicle where you don't get taxed either on the contribution or the withdrawal as long as the money is used for qualified medical expenses. While that may seem limiting, a big portion of life's expense is medical. This recent study from Fidelity claims the average couple in retirement will spend $215K for medical. So for practical purposes, any money saved in a HSA probably will never get taxed unless you have to take the money out for non-medical emergencies. Hence, I describe HSAs as IRAs on steroids.

Since a HSA requires a high deductible plan, the key question is rather simple: can the premium reductions from a high deductible plan cover possible out of pocket costs? With that in mind, I used the site HSAInsider to search for for HSA-compatible health insurance plans. If you enter the number of employees and average age into their search engine, HSAInsider will also return premium estimates. Those numbers were pretty close to the follow up quotes from our broker. Turns out we're not we are not experienced-rated (nothing special about workers sitting in front of computers) so our premiums are based solely on headcount and age.

The health insurance plans

So a week after a phone call to our broker, we got the following numbers:

Plan	Premium	In Network	Out Network	Indiv Ded/OOP	Family Ded/OOP
Blue Shield PPO 250 (current plan)	$8978	90%	70%	$250/$2000	$500/$4000
Blue Shield HSA 2600	$3617	70%	50%	$2600/$5000	$5150/$10000
Blue Shield HSA 3400	$3128	70%	50%	$3400/$4500	$9000/$9000
Blue Cross HSA 2400	$3879	80%	50%	$2400/$3600	$4800/$5500
Blue Cross HSA 3500	$3412	100%	50%	$3500/$4000	$7000/$7500
HealthNet HSA 20	$3880	80%	50%	$2500/$3500	$5000/$7000
HealthNet HSA 30	$3105	70%	50%	$3500/$4500	$7000/$9000

What do these numbers mean? Here's my best guess from paying medical bills and reading convoluted plan materials:

You first pay 100% whether you're in network or out of network up to the deductible.
Next, the health insurance plan pays the predetermined in-network/out-of-network percentage until the OOP (out of pocket) max is hit.
Finally, the network is responsible for 100% of all costs beyond OOP whether in network or out.

Cost savings and benefit changes

With precise numbers in hand, we can now calculate what happens if we fund employee HSA accounts to the IRS max (7 family * 5650, 2 indiv * 2850) to offset the high deductibles/OOP max.

Plan	Premium	HSA Funding	Savings	Yr Savings
Blue Shield PPO 250 (current plan)	$8978	$0	$0	$0
Blue Shield HSA 2600	$3617	$3771	$1590	$19K
Blue Shield HSA 3400	$3128	$3771	$2079	$25K
Blue Cross HSA 2400	$3879	$3771	$1328	$16K
Blue Cross HSA 3500	$3412	$3771	$1795	$21.5K
HealthNet HSA 20	$3880	$3771	$1327	$16K
HealthNet HSA 30	$3105	$3771	$2102	$25K

Basically, every HSA option compared to the standard PPO plan was a winner for the employer even after funding everybody's HSA account to the IRS max. But what about possible downsides for plan participants? Let's look at what employee exposure for paying with their own money beyond employer HSA contributions.

Plan	Indiv Exp	Family Exp
Blue Shield PPO 250 (current plan)	$2000	$4000
Blue Shield HSA 2600	$2150 (increased exp)	$4350 (increased exp)
Blue Shield HSA 3400	$1650	$3350
Blue Cross HSA 2400	$750	-$150 (guaranteed surplus)
Blue Cross HSA 3500	$1150	$1850
HealthNet HSA 20	$650	$1150
HealthNet HSA 30	$1650	$3350

After looking at these numbers, the final decision was rather easy. The Blue Cross HSA 2400 plan had the least exposure which made it an easier sale to employees and only was a tad bit more expensive than higher deductible plans. In terms of network coverage, Blue Cross and Blue Shield are relatively equal for the states our employees are in (California and Florida) with HealthNet trailing behind in number of doctors. Of course, pre-funding a HSA means you don't care whether you're in network or out of network up to the deductible amount.

HSA account funding

With high deductible + HSA a win-win for all parties involved (except for insurance companies receiving lower premiums), the next phase was researching the implementation details. To make HSAs work, somebody has to administer the money. Why not a simple bank account you ask? Unfortunately, somebody has to report to the IRS that you made a tax deductible contribution just as if you contributed to an IRA. Hence a rather specialized industry has formed to meet this need.

A quick look at Vimo shows hundreds of HSA administrators (mostly banks) offering varying services, benefits and fees. On a lark, we decided to filter for local banks and Patelco Credit Union was 1 of 2 local administrators. 5.12% APY, $1/monthly fee, free bill review service, checks, debit card -- perfect for funding initial accounts. Vimo's HSA report shows Patelco has having the highest net (interest - fees) return so it looks to be a good choice.

Managing HSA money

For HSA account holders, managing money requires some extra planning. While you certainly shouldn't hold off treating life-threatening problems or emergencies, scheduling as many treatments as possible during a single plan year produces the best monetary result. For example, if you are planning to have a baby, most of the medical visits are clustered around the months before (for the mother) and after birth (for the baby). This means having a baby about 6 months into a plan year would use up all HSA funds for the year (and then get covered by insurance) but would leave most of the previous + following years untouched.

The idea of course is being a smart buyer for medical goods and services reduces expenses all around for everybody involved. Because our decision to switch health plans is so recent, I don't have a lot of experiences to share in this arena. However, some easy things I can think:

Buy generic drugs and supplies
Ask for discounts beyond fee schedule in return for immediate payment -- health insurance is typically slow in paying bills and many doctors live a high flying lifestyle requiring constant cash-flow
Preventive health care and maintenance
Live healthier lifestyles

How much could you build up in your HSA account over time? My guess now is the average family could see HSA surpluses of about $3000 3 years out of 5 with a fully funded account. And a young single participant could probably bank almost everything 9 out of 10 years. This makes investing HSA surpluses important after a few years of buildup.

HSAs are personal accounts -- that means you have right to transfer money out of an employer funded account at anytime to another account of your choosing. Unfortunately, the investment options currently are sparse. You can't simply call Vanguard up and sign up for a HSA. Instead, you have to go through 3rd parties who will then pass on extra fees to you. Here are some of the better options I've been able to Google up:

Administrator	Options	Fees
HSA Administrators	21 Vanguard Funds	$39 yearly +0.36% on balance
HSA Bank	Brokerage	$27 yearly for < $3K savings balance $15 per trade various irritating fees
HSA Resources	Brokerage	$40 yearly $14.95 per trade
Saturna Capital	6 Saturna Funds	No fees other than fund expense ratios
SelectAccount	15 Funds from various companies	$27 yearly

When you visit these sites, you'll see most of them have all sorts of complicated twists in their schedules of fees so you have to analyze each option in terms of opportunity cost. For example, if you have to put in a minimum of $2000 in their checking account earning 2% interest, would it be a better option to instead get 5.12% at Patelco and pay the low balance fee? So I created the a spreadsheet (HSA_investment_options.ods) that models all the factors based on how much you have invested. Assuming we're picking the 65/35 stock/bond fund options available, the total expense ratios look like so:

	HSA Administrators	HSA Bank	HSA Resources	Saturna Capital	Select Account
$1000	4.43%	2.80%	4.10%	1.21%	5.45%
$2500	2.09%	1.18%	1.70%	1.21%	2.53%
$5000	1.31%	0.64%	0.90%	1.21%	1.55%
$7500	1.05%	0.46%	0.63%	1.21%	1.23%
$10000	0.92%	0.37%	0.50%	1.21%	1.07%
$15000	0.79%	0.28%	0.37%	1.21%	0.90%
$20000	0.73%	0.24%	0.30%	1.21%	0.82%
$35000	0.49%	0.18%	0.21%	1.21%	0.72%
$50000	0.39%	0.15%	0.18%	1.21%	0.68%

One word: ugh. I am used to investing directly at Vanguard so the low balance total expense ratios are total turnoffs. (Mind you, these are the cheapest HSA investment options available.) Unless better options come to the market, I have no plans to invest my HSA money until I reach the $7500 mark.

Final thoughts

My personal experience with HSAs is just starting so I can't claim to be the ultimate authority on this subject. However, it does look to be be a great option for those who are responsible for their own health insurance premiums (self-employed, high share of premiums, money-back for not participating). My recommendations: If you work for a "nice" company currently offering a traditional plan, ask HR to look at HSA options. If you work for an "evil" company, I'd stay completely silent as they'll probably take the premium reductions and tell you to fund your HSA yourself.

Updates

I wrote the majority of this post in 2007. Since then, the contribution limits for 2008 have increased to $5800 for families, $2900 for singles.
We switched our plan starting September so all participants were funded for 4 months in 2007. However, the IRS allows a full contribution even for mid-year starts. This allowed me to make an additional deduction contribution of $3766.66 to reduce my taxable income for 2007.

EDIT: Replaced broken Forbes link with the source Fidelity article.

Greetings & Introduction

2008-02-08T10:43:40Z

"Groan ... not another personal finance blog."

If all I did was repeat "spend less than you earn" advice, this website would have little value since there are plenty of good blogs (e.g., Get Rich Slowly or The Simple Dollar) that already cover these areas rather extensively. Instead, I will focus on topics more targeted towards small businesses. Perhaps you are an owner or employee at a small company and want a better health insurance or retirement savings plan. I will post about some of our experiences in those arenas and hopefully it may give you some pointers on where to turn. But due to this tight focus, I won't be able to fire off new ideas compared to a more general finance site. (I wouldn't have the time either.)

"Interesting ... but why should I read YOUR blog."

I'm not going to claim to be the ultimate business entrepreneur but I do have experiences in several ventures. I am a major stakeholder in a small Internet ASP (application service provider) that is finally hitting maturity after a decade of intense work. At the same time, my wife is half owner of a boutique clothing store. Hence, I have knowledge of both the high flying tech industry and also the traditional retail industry. Over time, I will try to sprinkle stories from both (and from failed attempts) in between posts filled with enough numbers to numb your brain.